Private equity plays an increasingly pivotal role in mid-market media M&A. New business models and changing markets have increased interest in new deals at a time when the potential investment and growth capital avenues for media companies are expanding.
As highlighted in the latest edition of BDO’s MEDIATalk publication, private equity’s (PE) appetite for media companies is growing.
Media is a sprawling landscape of diverse sub-industries. Sub-industry characteristics and national and regional dynamics have contributed to how the pandemic has affected media companies.
Overall, the industry has shown itself remarkably resilient to the impacts of COVID-19, buoyed in part by increased demand for digital information and entertainment services. Globally, the combined 2020 value of media-related M&A topped $130 billion. Even though the number of announced deals dropped in 2020, average deal values increased by around 14%.
Data: Statista, Graph: BDO Global
PEs were active throughout the year, particularly in the second half that saw a 19% increase in deals over H1 2020. Media sub-sectors that have traditionally not seen strong PE interest, including ad tech and digital media, were drivers of this story.
The increased interest coincides with new avenues to growth capital appearing, such as SPACs (Special Purpose Acquisition Companies) and a general increase in media investments. For media companies, the situation raises questions like: which funding opportunities should we be pursuing? And how can we get the best result from an M&A process?
Digital, subscriptions, and data in PE’s focus
PEs’ interest is growing across much of the media landscape, with companies displaying solid data and digital capabilities being of particular interest. Increased digital spending from advertisers, and growing consumer preference for digital solutions, are among the driving factors. As Financial Times reported, 2020 saw digital advertising spend surpass traditional advertising.
Data: Nielsen, Graph: BDO Global
Digital and data capabilities can be viewed as broad categories, including many companies across AdTech, Martech, customer experience, and data insights/data analytics. Core qualities that many PEs are looking for are an ability to generate first-party and zero party data and solid in-house data processing abilities.
A general observation is that PEs are showing increasing interest in technology-driven companies, including in media spaces where they were previously less active, including advertising and marketing. With almost $1 trillion of dry powder to deploy, and some sectors (for example, hospitality) challenging to invest in right now, PE firms must look elsewhere – including increasingly toward media.
However, the broader point is that the nature of many media businesses has changed. Previously many were people businesses with inherent risks such as losing key creative employees or well-connected individuals who could leave and take important clients with them. Many media businesses are now more like a tech business, with recurring revenues, scalable IT platforms and, critically, less reliance on specific individuals.
Simultaneously, PE houses are increasingly open to pursuing new kinds of media investments, including famous artists’ song catalogues and muzak companies.
The UK example
The UK media M&A landscape showcases many of the trends and tendencies that are also driving activity globally.
Data and graph: BDO MEDIATalk, H2, 2020
UK PE-led media buy-and-build deals performed strongly in 2020 and the first part of 2021, demonstrating the increased value PEs see in areas such as digital content producers and digital marketers.
The UK also saw deals related to the advances in programmatic modelling, digitisation and global scalability in the advertising and marketing space. PE houses are attracted to advertising’s increased strategic capability to measure and track effectiveness via data-driven decision-making. Another reason is the recurring revenue and resilience that these businesses have shown during the impact of COVID-19.
TV and film’s market growth during the ongoing ‘streaming wars’ has increased PE’s interest. In November 2020, Aleph Capital and Crestview Partners acquired Framestore, a UK based visual effects company that has worked on many UK children’s entertainment titles.
Overseas investors were also active (although it should be noted that the pandemic has led to a slow-down in cross-border PE-media deals). For example, PE investor CVC Partners (headquartered in Luxembourg) has invested in stakes in the English Premiership Rugby and the Six Nations Rugby tournament.
In particularly the mid-market segment, PE’s are seeing increased competition for deals. A new type of marketing services firms have emerged that go beyond traditional media strategies by including service offers such as technology best practices advice, in-house team design and technical implementation, advanced data tracking and measurement, and data privacy consulting. A prime example is S4 Capital Group which completed a string of acquisitions in 2020, including digital marketing firm Circus Marketing, and data and analytics consultancy Digodat.
Investment options growing for media companies
PE remains a productive avenue for media companies looking to secure a level of investment that enables owners to take some cash off the table and facilitates growth. Furthermore, PE buyout deal multiples are at or near record levels. While this puts pressure on acquired companies to show strong growth, facilitating such growth is also a core reason for pursuing a deal with a PE. With the right PE on board, access to advice, influential people, new customer bases, sparring on business organisation and processes, plus expertise on raising profitability are some of the benefits for a media company.
“Private Equity remains a credible, viable option for media companies looking to work with a partner to grow their business. PE’s focus on balancing stability with a focus on sustainable growth supported by capital resources make them a particularly relevant partner in the mid-market segment," Dan Adler, Partner at PE firm Apiary Capital, says.
Data, Graph: BDO PE Private Capital Pulse Survey Spring 2021
Achieving said advantages is no guarantee. Throughout an M&A process, media companies need to be acutely aware of all aspects of the contract they are entering and prepare for post-merger collaboration.
It is also important to be aware of the different available funding avenues. PEs and traditional banks, along with debt funds and capital markets, are awash with cash. Furthermore, new investment vehicles, such as SPACs, can be the right choice in some cases.
A valuable approach to considering what type of investment to pursue is to consult with financial advisors on central questions such as:
- What kind of investment levels are you looking for?
- How important is it for you to maintain control of the company?
- Which business aspects do you see as critical for further growth?
- Who would be best suited to help you achieve that growth?
Preparing for new capital
Whether a media company chooses to pursue PE funding or other avenues of funding, there will be a need to preparing company, management, and business structures well in advance.
As detailed in BDO guides for companies in related spaces considering PE investment, there are many steps to consider throughout the process.
The details, and the company growth story, are often found in the data. Starting to prepare and structure a company and deal negotiation information should include considerations about the fact that partnerships with PEs often last for three to five years.
It may be an advantage to look at the deal in three distinct phases:
- Readiness and preparation: Preparing the company for a sale to a PE. Establish the fundamentals of your PE deal. Agree on a timetable and approach with stakeholders. Your business plan and marketing information must tell your “equity story”, set out and provide factual evidence for the investment hypothesis that you will take to investors.
- Marketing: With stakeholders aligned around a clear definition of success and a business that is geared for sale, you are ready to take your investment pitch to investors and generate interest and competitive tension. Finding the right investor is key – whilst money is relatively homogenous, the PEs that manage it are not.
- Deal completion: Deal completion is about moving from a shortlist of potential investors to securing a deal with a single investor. You will move from informal conversations and non-binding offers to a final sale and purchase agreement. This will involve legal, tax and financial advisors on both sides and a great deal of high-pressure negotiation.